Trading the Odds

A statistical approach to profit in the US equity markets, trading the markets like professional card counters are playing Blackjack or expert poker players are playing Poker.

Trading the Odds on Tuesday – June 2, 2009

WE031672-klein

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I’ll be on vacation (in Italy)

starting Sunday, May 31 and going through the end of next week.

While I’m away

frequency and extensiveness of blogging will mainly depend on the local availability of cellular broadband internet access and/or local WLAN (chances are good), but will probably be less frequent and shortened as well.

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Currently we’re truly trading under abnormal market conditions, seemingly sometimes trading against all odds but not with the odds.

Although an otherwise reliable negative setup was triggered on Friday’s close due to the fact that the S&P 500 closed higher at least +1.30% on two consecutive sessions‘ and ‘the S&P 500 opened higher, posted a higher high, a higher low and a higher close than the previous session’s high/low/close, and finally closed above it’s open, the market today build on last week’s gains and posted another higher close +2.58% above Friday’s close.

Market breadth was strong again (but with a TRIN in regularly bearish territory above 1, I’ll stick to that later in the post) with NYSE Advancing Issues/Declining Issues at 4.45, and NYSE Advancing Volume/Declining Volume at 3.26 (NYSE TRIN at 1.37). The S&P 500 opened higher, posted a higher high, a higher low, a higher close than the previous session’s high/low/close,  finally closed above the open and left an unfilled opening gap on the upside due to the fact that today’s low was +0.35% above Friday’s high.

It was only the fourth occurrence since 02/02/1990 that the S&P 500 posted 3 consecutive higher closes at least +1.3% above the previous session’s close (04/02/2009, 01/02/2009, 08/08/2002, and in all those 3 occurrences the E-mini S&P 500 closed higher on a fourth session as well).

But -with respect to normal market conditions,  and as always from a historical and statistical perspective- several setups with a (significantly) negative tendency concerning the S&P 500′ next session’s performance were triggered on Monday’s close:

  • with Monday’s session the S&P 500 closed higher at least +1.00% on three consecutive sessions (Setup S1),
  • the S&P 500 opened higher, posted a higher high, a higher low, a higher close than the previous session’s high/low/close, finally closed above the open and left an unfilled opening gap on the upside (Setup S2),
  • the ratio of NYSE Advancing Issues/Declining Issues came in higher than 4, but the ratio of NYSE Advancing Volume/Declining Volume came in only higher than 3 below the ratio of NYSE Advancing Issues/Declining Issues, for a logically higher NYSE TRIN at 1.37 (Setup S3), and
  • the S&P 500 closed higher, but NYSE TRIN closed higher than 1.35 (Setup S4) in regularly bearish territory, and finally
  • Setups S2 and S3 combind (Setup S5).

Table I shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) on the next session (in this event Tuesday, June 2) immediately following those sessions where setup S1 to S5 listed above had been triggered.

2009-06-01-ES-1

It is especially notable that the market (E-mini S&P 500) shows a significant tendency of a lower close the then following session with respect to all 5 setups, concerning both the probability for a lower close the next session and profit factor (expectancy and pay-off) as well. Especially setup S5 as a combination of the 6 highs and a NYSE TRIN in regularly bearish territory shows  a profit factor (0.26) significantly below the at-any-time profit factor (1.07) on the next session.

Table II now shows the ES (S&P 500 E-MINI) intraday performance (since 01/02/1990) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on the next session (in this event Tuesday, June 2) immediately following those 35 sessions where the S&P 500 opened higher, posted a higher high, a higher low, a higher close than the previous session’s high/low/close, finally closed above the open and left an unfilled opening gap on the upside on the same day when ‘the ratio of NYSE Advancing Issues/Declining Issues came in higher than 4, but the ratio of NYSE Advancing Volume/Declining Volume came in only higher than 3 below the ratio of NYSE Advancing Issues/Declining Issues, for a logically higher NYSE TRIN at 1.37 (setups S2 and S3).

2009-06-01-ES-i1

2009-06-01-ES-i2

It is especially notable that

  1. the market (S&P 500 E-MINI) regularly shows a notable tendency of a lower open the then following session (on 23 out of 35 occurrences),
  2. the market (S&P 500 E-MINI) regularly shows a notable tendency of limited intraday upside potential during the next session due to the fact that the respectiv profit factor on the ‘high’  (9.88) is only half the respective at-any-time profit factor (for statistical purposes only in order to demonstrate that the magnitude of change on the high a),
  3. the average losing trade concerning the low is significantly higher than the respective at-any-time losing trade factor due to the fact that intraday losses significantly exceed the respective at-any-time losses on the low on the following session,
  4. chances are very high that the market will post an intraday low significantly below Monday’s close as well (the average losing trade on the low is greater than the respective winning trade on the high), and
  5. chances are high as well that the market will finally close lower on the day, with a profit factor of 0.26 significantly below the respective at-any-time profit factor.  On those 35 sessions which fulfilled the setup mentioned above, the S&P 500 managed a higher close of at least +1.0% or more only once, while it closed lower  -1.0% or more on 12 out of those 35 occurrences.

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Bottom line:

  1. History suggests that that market is currently even more (short-term only) extended on the upside. Under normal market conditions the S&P 500 would probably show some intraday weakness on Tuesday’s session and would probably close lower as well, but
  2. with respect to those 3 sessions since 01/02/1990 when the S&P 500 had posted 3 consecutive higher closes at least +1.3% above the previous session’s close (04/02/2009, 01/02/2009, 08/08/2002, like Monday June 1, 2009), in all those 3 occurrences the E-mini S&P 500 closed higher on a fourth session as well.

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Disclaimer: Long BGZ (Daily Large Cap Bear 3x Shares ) at time of writing.

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The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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